Assume an economy without government and without trade. Suppose the Consumption function is given by C=100+0.8Y, whereas I=50. (Remember to show your work)*
A. What is the equilibrium level of income in this case?
B. What is the level of saving in equilibrium?
C. If, for some reason, output is at the level of 800, what will the level of involuntary inventory accumulation be?
If I rises to 100, what will be the effect on the equilibrium outcome?
D. What is the value of the multiplier, a, here?
2nd Problem
Suppose the consumption behavior in problem 1 changes so that C=100+0.9Y, while I remains at 50.
A. Is the equilibrium level of income higher or lower than it was in problem 1(a)? Calculate the new equilibrium level, Y’, to verify this.
B. Now suppose Investment increases to I=100, just as in problem 1(d). What is the new equilibrium income?
C. Does the change in investment spending have more or less of an effect on Y than it did in problem 1? Why?